More pain for BP after decision to shut Kwinana refinery

PERRY WILLIAMS

SENIOR BUSINESS WRITER

NOVEMBER 1, 2020

BP will slash 20 per cent of its Australian staff in a further blow to the nation’s energy sector after its decision to close the Kwinana refinery, with Energy Minister Angus Taylor to hold crunch talks to stop three remaining facilities shutting their doors.

The British oil and gas giant has started the process of cutting about 200 office roles, sources told The Australian, in addition to the 600 manufacturing workers out of a job within six months following its decision on Friday to close the nation’s largest refinery, Western Australia’s Kwinana ­facility.

BP confirmed the corporate cuts, which form part of a global cull by boss Bernard Looney, are aimed at slashing costs and changing the focus of the business to a low carbon future.

The move will ratchet up concerns given thousands of jobs have already been lost in Australia’s energy industry this year, amid sustained economic fallout from the COVID-19 pandemic which has reduced fuel demand.

“This decision has been driven by our plans to reinvent BP to meet our new purpose, and has been accelerated by the current economic environment,” a company spokesman told The Australian.

“We expect the majority of jobs impacted will be office-based roles right across BP, not frontline employees in operations. To ensure safety and operational reliability, we are protecting our people in the field and on the frontline of the company as much as possible.”

Mr Taylor will hold individual meetings this week with Ampol, which runs Lytton in Brisbane, Viva Energy, operator of Geelong in Victoria, and ExxonMobil, owner of Victoria’s Altona plant, as fears mount the entire oil refining industry could be gone within a year.

Mr Taylor will sound out refiners on the federal government’s proposed assistance package for the industry, which includes the introduction of a production payment based on their fuel security contribution to Australia.

BP blamed a regional oversupply of capacity and sustained low refining margins for its decision on Kwinana, with Exxon hinting smaller operations could face the axe, raising questions over Altona’s future.

“As you look to some low to medium conversion refineries — especially those that are not in good geographical locations where you have growing demand — they‘re all under water. And so, we’ve already had some closures. I expect there will likely be more,” Exxon senior vice-president Jack Williams said on the company’s earnings call late on Friday.

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“And the deeper, the longer we stay in this sort of environment, the more announcements will come out. So, yes, I do think we’re oversupplied right now and the market will take care of that through these closures.”

Exxon revealed in September Altona was trading at a loss and facing “unprecedented pressure” from Victoria’s tough lockdown measures.

“Clearly as you look at medium, low-complexity refineries in an OECD country, that’s not integrated with chemicals, those are going to be a challenge going forward and that certainly plays into our thinking,” Mr Williams said.

Exxon, Ampol and Viva face similar pressures to BP and could be forced to close their refineries, MST Marquee said.

“In reality, while they all have their own nuances, the pressures Kwinana is facing are largely the same for the other three,” MST Marquee analyst Mark Samter said.

With Kwinana axed, the Morrison government may be forced into a bigger rescue package to keep the remaining plants open.

“ ‘Will the government spread the same Australian dollars across less refineries?’ is an interesting question. Without that, I still expect more of them to close,” Mr Samter said.

Ampol’s Lytton refinery booked a September quarter loss of $82m while Viva suffered a $30m loss. Both are under review, with Ampol due to make a decision in the second quarter of 2021 while Viva will update the market in December on whether it will keep Geelong running beyond the first quarter of next year.

“Altona is a pathetic-sized refinery, so I don’t see how it stays open. With Lytton I think it is just a huge strategic and capital markets noose around the neck of Ampol. The volatility and negativity for the foreseeable future stops them from prosecuting sensible decisions. So I think from an equity market perspective, people would be delighted to see it convert to an import terminal,” Mr Samter said.

“That then leaves Geelong for Viva as perhaps the most likely to remain, but again Viva is not a charity, so will only do so if enough support is provided to make the logic stack up.”

Kwinana will be the fourth Australian refinery to shut down since 2012. Even with BP in the market, the remaining plants now produce only about 40 per cent of Australia’s fuel needs, with the rest imported.

Australian Workers Union national secretary Daniel Walton said he was worried about the effect BP’s decision would have on the nation’s remaining refinery fleet.

“One domino falling can have a flow-on effect,” Mr Walton said. “The shameful part of BP’s decision is all other refiners have engaged with their workforce and the government on issues before them. BP has taken the ultimate coward’s path. A lot of people say COVID-19 presents difficult times but when you have a social licence that means you have to roll your sleeves up and do the hard work as well.”

BP Australia boss Frederic Baudry told The Australian it had engaged with the Morrison government, but structural changes had led to the decision.

“There are ways to make refining more economic but those ways — given the fundamental demand supply economics — require significant commercial investments rather than being a matter of local policy settings,” Mr Baudry said.

BP’s decision also comes ahead of a major four-yearly maintenance shutdown of Kwinana in 2021, with the refurbishment likely to have cost the company close to $100m.

Ampol and Viva both backed Canberra’s support package when it was announced but remain cautious over the outlook for the sector given soft margins, high costs and plunging demand due to COVID-19 lockdowns.

The British company’s decision on Kwinana will add to fears the nation’s refining sector could disappear in the face of falling demand during the pandemic and competition from far larger refineries in Singapore, South Korea, Japan and elsewhere in Asia.